Analysts bullish on Aramco despite share price drop

Reuters/Ahmed Yosri

• 17% fall in 2024
• Worst among rivals
• Recovery possible in line with oil price

Shares in Saudi Aramco slumped to a four-year low this week as turmoil on global equity markets spurred a further sell-off in the world’s largest listed oil company.

Yet analysts believe Aramco’s poor performance this year – the stock had fallen 17 percent in 2024 as of Tuesday’s close – masks a bullish outlook for the company versus its international rivals.

“Aramco is a strong company with solid cash flows and can increase production levels as crude demand improves,” said Ahmed Hazem Maher, an equity research director at financial services company EFG Hermes in Cairo. “The recent stock price decline is a reflection of a correction in global equities rather than anything related to Aramco itself.”

Aramco’s shares ended Tuesday at SAR27.20, down 26 percent from a May 2022 peak of nearly SAR37 and slumping to its lowest level since June 2020; the stock subsequently recovered some of its recent losses to end at SAR27.75 on Wednesday.

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In June, Aramco sold 0.7 percent of its stock in a secondary listing that was priced at SAR27.25 per share and raised $12.35 billion. Saudi Arabia owns 81.5 percent of Aramco and the state-owned Public Investment Fund holds a further 16 percent.  

Junaid Ansari​​​​, director of investment strategy and research at Kuwait’s Kamco Invest, said Aramco’s share price decline reflects Saudi Arabia’s pledge to cut oil production as part of an Opec+ agreement.

“Pressure on refining and chemical margins have also affected (Aramco’s) profits,” said Ansari.

Among 10 major international oil companies, Aramco is the worst share price performer this year, followed by ConocoPhillips (-13 percent). Chevron, TotalEnergies, BP, Equinor and Eni have all made single-digit declines, while PetroChina (+18.9 percent) and Exxon Mobil (+12.1 percent) are the top performers in 2024.

Meanwhile, Brent crude was trading at $78.08 early on Thursday and is nearly flat this year. It hit a 2024 peak of above $91 in early April.

“Aramco’s share price has decoupled slightly from its usual correlation with oil prices,” said EFG’s Maher.

“That was partly driven by an overhang from investors anticipating the secondary share sale. Now that’s been completed I see no reason why Aramco’s share price shouldn't revert to its correlation with oil prices and return to the levels it was at previously.”

Ansari said Aramco’s recent stock price “could be a good entry point”, highlighting the probable easing of output cuts and the company’s dividend yield – which, at 6.9 percent, is the second-best among major oil companies.

Only Equinor’s (12.2 percent) is higher. The average among the 10 oil companies is 5.7 percent, according to AGBI calculations.

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“Aramco's 2024 dividend yield is inflated due to its introduction of a performance-linked dividend,” said Maher. “That will pay out the excess cash flows of 2022 and 2023 this year. So, beyond the 2024 distributions, we expect the dividend to correct.”

At EFG Hermes’ fair value of SAR31 per share, it is likely Aramco’s dividend yield would fall to about 4.5 percent once its dividend policy returns to normal, Maher explained.

Aramco’s shares remain expensive from a price-to-earnings perspective, trading at a PE ratio of 15.0 – higher than the nine other oil companies. Including Aramco, the average PE among these 10 was 11.5, AGBI calculations show.

“The key distinction between Aramco and other major oil companies is the longevity of Aramco’s reserves,” said Maher.

“Aramco has sufficient reserves for 60-plus years, while other majors must reinvest in buying new resources and assets globally to maintain their reserve-to-production ratio at 15 years. This variation means Aramco’s PE multiple will always be very different.”

Ansari said investors will likely refocus on non-US and non-European oil majors. Companies from these regions have pledged to cut carbon emissions while also face investor demands for higher returns, he explained.

“This will gradually benefit oil players in the [Gulf] region, especially given the significantly lower cost per barrel to produce crude oil,” said Ansari.

Lower earnings

Eight of the 10 oil companies on which AGBI compiled data reported lower half-year profits compared with the first half of 2023. Aramco’s half-year net profit fell 7.4 percent to $55.9 billion.

Yet even with this decline, it remained the third-best performer in terms of year-on-year change in profit. Only ConocoPhillips (+7.9 percent) reported an increase in profit, while PetroChina has yet to publish its half-yearly results.

“The decline in (Aramco’s) profits mainly resulted from falling output and lower refining and chemical margins,” said Ansari. “Moreover, crude oil prices failed to see any noticeable surge and remained range-bound despite lower Opec+ crude oil output.”

If demand increases as expected, Aramco’s output and oil price should both rise, which will support the company’s earnings in the second half of 2024, he said.

“We believe this is a temporary phase for Aramco shares and expect a gradual reversal in the coming months,” he added. “Continued dividend payouts, as repeatedly demonstrated by the company, [are] a strong positive for the stock.”